Linda McMahon says that Obamacare is “bad medicine.” But the Affordable Care Act, taken as a whole, makes an offer you can’t refuse. At the core of the ACA are subsidies that make health insurance affordable by middle-class families. To help pay for those subsidies, the ACA requires families to make a “shared responsibility payment” if they choose not to get coverage. Overall, taking advantage of the ACA subsidies is a far better alternative than gambling that you won’t need health care. 

Many individuals and families, if they are not covered by their employer’s health insurance plan, currently gamble that they will remain healthy enough to avoid medical care – or if it’s needed, that the cost won’t be astronomical. If she had not been covered by her employer’s health insurance plan, negotiated by her union, our daughter might have made that gamble.  But this year she learned how catastrophic losing that gamble could have been. Fearing appendicitis, she went to her hospital’s emergency room. Fortunately, appendicitis was not diagnosed, but the hospital said the procedures performed to reach that conclusion would have cost her $17,755 had she not had insurance coverage.

The market rate was that high – in part – because millions of her peers DID make that gamble, and lost.  So medical providers, seeking to recover the costs of providing care to those who did not have insurance and who could not pay out of pocket, shifted the cost of providing uncompensated care to those who could afford to pay. (Part of the cost shift also occurs, not because of a gamble, but because some folks who ardently desire health insurance are denied insurance coverage because of a pre-existing condition.) This meant increased charges for the “self-insured” and insurance companies, which in turn passed on those higher costs to their policy-holders in the form of higher premiums.

Americans have long since decided – reflecting our basic values – that we ALL should share the burden of providing income support to the elderly (with Social Security), and providing basic health care for persons who are over 65 (with Medicare) or who are very poor or have disabilities (with Medicaid).  Most employers also provide health insurance coverage as part of the compensation package for their workers.

The Affordable Care Act – “Obamacare” – does not interfere with health insurance coverage that already exists. The Act just extends the right to accessible, affordable health care even further, as a matter of fundamental fairness. Under the ACA,

—insurance companies since 2010 cannot deny coverage to children with a pre-existing condition, and starting 18 months from now, cannot deny coverage to anyone with a pre-existing condition

—health insurance companies since 2010 cannot cancel coverage when someone gets sick

—insurance companies since 2010 cannot limit the amount of health care a person can receive in his/her lifetime, and starting 18 months from now, cannot limit the amount of health care a person receives each year

—after 2013, insurance companies cannot charge women more than men for health coverage

—after 2013, insurance companies cannot charge people with pre-existing conditions or those who are ill more than healthy persons.

Standing alone, these “guaranteed issue” and “community rating” provisions of the ACA that make health insurance more accessible would probably increase premiums, because the people newly entering the market would most likely be older and/or have pre-existing conditions – people who had been unable to buy insurance but would need insurance the most. An effective insurance pool of “risk-sharers,” however, must be as large as possible, including both heavy-users and light-users, so that those in the pool represent the population as a whole. Enter the requirement that all individuals share responsibility, and risk, by having insurance. But unless there is some incentive to participate in the pool – either a carrot or a stick – there will be some who will seek to evade the requirement.  So the Affordable Care Act uses two devices to diminish the number of free riders:

1. It extends substantial subsidies to those who find it difficult to afford insurance, even when it is theoretically available. This is the carrot.

2. It imposes a “shared responsibility payment” on those who do not have insurance.  This is the stick.

The Carrot

Making insurance affordable is at the heart of the Affordable Care Act.  Surveys have shown that most Americans who are uninsured want coverage; they just need the financial wherewithal to be able to get it. The ACA enhances their opportunity to get coverage in two ways:

—by extending the eligibility for Medicaid to all citizens and legal residents – not just children and the disabled – who have low incomes (less than 133% of poverty)

—by providing substantial subsidies – in the form of advanceable, refundable tax credits – for individuals and families below 400% of the poverty level who don’t have insurance through their employers but purchase coverage on their own.  (A family of 4 with income up to about $90,000 would qualify for at least some tax credit.)  And the subsidy is further enhanced by additional cost sharing assistance. 

—For example, under the ACA, if a benchmark insurance plan hypothetically cost $9,000, a family of 4 earning $50,000 could expect a tax credit of about $5,430, because the annual premium cost is limited to a specific percentage of income, equal to $3,570 in this example – and if the family chose to purchase a less expensive plan, the annual premium cost might be as low as $2,070. 

—For a family of 4 in which the head of the household is between the ages of 55 and 64, earning $50,000, insurance premiums would be higher, but the tax credit would also be higher.  If the insurance plan for that age group cost $14,000, the tax credit would be $10,430 (the annual premium charge would remain at $3,570).

—The credits are both advanceable (the subsidy is paid in advance to the insurer, so that the policy owner is not required to first pay the premium and then seek reimbursement), and refundable (like the Earned Income Tax Credit (EITC), if the tax credit is larger than the filer’s income tax liability, the taxpayer receives a refund of the excess amount).

—Total out-of-pocket maximums (including co-pays, coinsurance and deductibles) would also be reduced, depending on income (so that, for example, 94% of the total allowable medical expenses would be covered by the plan for families at less than 150% of poverty).

Almost all of the federal government’s expenditures under the Affordable Care Act are associated with the extension of Medicaid and the provision of subsidies for those who cannot otherwise afford health coverage.

The Stick

Still, not all uninsured families will take advantage of the premium subsidies unless there is pressure to do so. So those who do not have insurance coverage after 2013 but can afford to buy it will be required to make what the ACA terms a “shared responsibility payment” – whether it’s called a penalty, a tax, a fine, a mandate, or something else – as part of their federal income tax return. This payment is what is often viewed as synonymous with “individual mandate” and demonized by its opponents. But although it is a necessary negative incentive, very few will pay it, and it is not of great magnitude.

—At most, only about 2% of the total population would be subject to the requirement, because all of the following would be exempt:

—Everyone who receives insurance through his/her employer.

—Everyone who has already purchased an individual policy.

—Everyone on Medicare.  Medicare has already been paid for by another shared responsibility payment:  the current mandatory tax on every worker of 2.9% of earned income.

—Every person whose income is so low that they he/she does not have to file an income tax return.

—Everyone on Medicaid. After January 1, 2014, in Connecticut and in all other states which choose to take advantage of the option, every person with income less than 133% of poverty (about $15,000 for an individual and $30,000 for a family of four) will be eligible for Medicaid.

—Everyone whose direct premium for the lowest cost available insurance plan is greater than 8% of income.

—Compared to the market-rate premiums that a person would be charged to purchase health insurance, the amount of the shared responsibility payment is modest. 

—The annual payment is set at either a flat dollar amount or as a percentage of applicable income, whichever is greater.  After a phase-in, by 2016 the annual flat dollar cap is $695 per person and the percentage of income cap is 2.5% of applicable income. Regardless of family size, there is a annual family flat dollar cap of $2085, while the percentage of income cap for families is identical to that for individuals.

—By way of comparison, in the absence of the reform enacted by the Affordable Care Act, the average annual premium cost in 2014 for a family of 4 is estimated to be about $11,300. 

Weighing the carrot and the stick

Precisely because the amount of the shared responsibility payment is relatively small compared to the cost of purchasing insurance coverage if no subsidies were available under the Affordable Care Act, the magnitude of the difference might seem to make the purchase of coverage so cost-prohibitive that an uninsured family would continue to gamble that they will stay healthy and never need to visit a doctor or a medical facility.

But the very generous subsidies available to middle-class families under the Affordable Care Act radically alter the calculation.  In the example above, for a policy with a projected average annual cost of about $9,000, the maximum actual premium payment would be about $3,570 per year for a family of 4 with income of about $50,000.  (The subsidy would be about $5,430.)  In addition, if that family should need care, the out-of-pocket co-pays, co-insurance and deductibles would be limited. So the choice faced by this family is to:

—pay about $300 per month in subsidized premiums for a policy that provides an attractive level of coverage, with no annual or lifetime limits, or

—make a shared responsibility payment of about $170 per month, and “go bare,” hoping and praying that its members will never need the services of a doctor or an emergency room or other medical personnel – which might result in a substantial bill for which they would be personally liable.

Data show that, before the Affordable Care Act was passed, an individual in the United States incurred on average about $7,000 in health-care expenses annually, that 60% of adults without insurance visited a doctor’s office or an emergency room in a given year, and that each year there were more than 2.1 million hospitalizations of the uninsured. For 1.2 million of those hospitalizations, the hospital bill was greater than $10,000. For about 60,000 of those hospital stays, the bill was greater than $100,000.  Our family knows personally – as in the case of our daughter – that a person without insurance could be billed $17,000 or more for an emergency room visit.

Given that context, the subsidies under the Affordable Care Act are likely to persuade most families with incomes less than 400% of poverty that it makes sense to purchase health insurance, using those subsidies, and get something for your money, rather than make a shared responsibility payment, remain uninsured, and get nothing for your money. 

The Affordable Care Act makes currently uninsured families an offer they can’t refuse.

Bill Cibes is a former professor of government at Connecticut College and former chancellor of the Connecticut State University System. He formerly served as Secretary of the Office of Policy and Management in the administration of Governor Lowell P. Weicker.